SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Christine Marie Haunert-Faga, Applicant

AND:

Stephen Leonardo Glen Faga, Respondent

BEFORE: D. M. Brown J.

COUNSEL:
C. Reed, for the Receiver

R. Rueter, for the Receiver in the Recovery Action

M. Neirinck, for the Defendants in the Recovery Action, Giluiana Caprara in her personal capacity and in her capacity as Estate Trustee without a Will of the Estate of Bruno Caprara, deceased, Marco Caprara, Christian Caprara and Faga Group Construction Limited

M. Marrie, for the Defendant in the Recovery Action, Presta Caparrotta LLP

J. Long, for the Defendant in the Recovery Action, Domenico Faga

HEARD: March 8, 2013

REASONS FOR DECISION

I. Motion by a receiver-in-aid-of-execution for a cost immunity order

[1] Christine Marie Haunert-Faga and Stephen Leonardo Glen Faga were husband and wife. In 2007 they divorced. The May 9, 2007 Divorce Judgment which Christine obtained against Stephen required him to pay her $4.4 million, of which $1.3 million covered child support for their three young children. Stephen assigned his shares in Delzap Construction Ltd. to Christine in partial satisfaction of the Judgment. He has not paid anything else.

[2] Christine’s difficulties in enforcing the Judgment against Stephen led to this Court appointing a receiver-in-aid-of-execution on December 8, 2010. The Receiver, A. Farber & Partners Inc., collected some assets, but to date Christine has only received an interim distribution of $50,000.00.

[3] On October 5, 2012, the Receiver commenced an action against a number of Stephen’s relatives, his girlfriend and an accounting firm seeking to recover certain assets or entitlements which the Receiver contends are due and owing to Stephen and which should be made available to Christine as his judgment creditor (the “Recovery Action”). Although the Statement of Claim was served, no further steps have ensued because the Receiver is concerned that the assets in the estate would be insufficient to cover any liability in costs to the defendants in the event they successfully defended the Recovery Action.

[4] The Receiver does not want to expose its personal assets to a possible cost award, so the Receiver has brought this motion seeking an order “that the Receiver shall not have any personal liability for any costs awarded to the defendants” in the Recovery Action. The defendants in the Recovery Action opposed the order sought.

[5] For the reasons set out below, I dismiss the Receiver’s motion.

II. Background evidence

[6] Pursuant to the Appointment Order the Receiver retained Froese Forensic Partners Ltd. to assist in the investigation into Stephen’s assets, including the potential relationship between those assets and the construction businesses run by other members of the Faga family. According to the Receiver, prior to 2003 Stephen indirectly owned a 50% interest in Faga Group Ltd. (“Faga Group”) with his brother-in-law, Bruno Caprara, the husband of his sister, Giuliana. Bruno is deceased. Based on the investigation conducted by Froese, the Receiver asserted that:

(i) In 2003 or 2004, around the time Christine and Stephen separated, the assets of Faga Group were transferred to Faga Group Construction Limited (“Faga Construction”), a company owned either by Giuliana or Bruno, and that Giuliana holds 50% of the shares of Faga Construction in trust for Stephen;

(ii) Stephen has drawn funds out of Faga Construction, although as Christine’s judgment debtor he has maintained that he owns nothing, earns nothing, and cannot pay the Judgment;

(iii) Payments diverted through various Faga businesses were “laundered through the accounting firm Presta Caparrotta LLP”. The Receiver alleges that between 2003 to 2006 Faga Construction paid that accounting firm over $3 million, yet did not render an equivalent amount of professional services;

(iv) Stephen’s father, Domenico Faga, opened several bank accounts into which Stephen transferred his personal assets and over which Domenico gave his son a power of attorney; and,

(v) Some of the funds from Domenico’s accounts were transferred into accounts of a girlfriend of Stephen, Ms. Rhodena Macdonald.

Details of the results of the forensic investigation were set out in the Receiver’s Second Report.

[7] The Receiver retained independent counsel, the Rueter Scargall Bennett LLP firm, to draft and commence a claim against the Faga family members and companies, as well as Ms. Macdonald and Presta Caparrotta, to recover monies which it claims belong to Stephen and which are exigible for execution. The RSB firm has agreed to act on a quasi-contingency basis and the Receiver has agreed that the firm will enjoy a first charge over all proceeds of such litigation. RSB issued the Statement of Claim in the Recovery Action on October 5, 2012; it seeks to recover $4.8 million. The plaintiff is A. Farber & Partners Inc. in its capacity as Court Appointed Receiver of Stephen Leonardo Glen Faga. No defences have been filed pending the outcome of this motion.

[8] According to the Receiver’s Statement of Receipts & Disbursements for the period up to September 30, 2012, receipts amounted to $2.007 million, expenses (including counsel fees to March 29, 2012) totaled $133,502, with net receipts of $1.87 million. A disbursement of $50,000 was made to Christine in May, 2012. However, professional fees not yet approved or paid amount to $1.8 million: Receiver, $340,000; Froese Forensic, $500,000; and two law firms, $960,000. If those amounts are approved, the Receiver reported that “the Receivership estate will have approximately $121,000 available to pay fees and costs incurred after August 31, 2012”.

[9] Given that state of affairs for the estate, the Receiver reported:

[I]t is very likely that in the event, no matter how remote, that the Recovery Action is not successful and costs are awarded to the defendants, there will be no net assets available in the Receivership estate to respond to those cost claims.

The Receiver is not prepared to assume personal liability for the costs of the Recovery Action. The Receiver will not personally benefit from the Recovery Action. If the Court does not grant an Order that the Receiver has no personal liability for the costs of the Recovery Action, then the Receiver will discontinue that action and the Receivership estate will be deprived of any benefit of the claims advanced in that action.

[10] Christine filed an undertaking with the Court in the following form:

I, Christine Marie Haunert-Faga, undertake to the Court to abide by any Order of the Court awarding costs to the Defendants in [the Recovery Action] which the Court, in its discretion, orders me to pay personally.

[11] The defendants in the Recovery Action opposed the order sought by the Receiver, taking the position that the Recovery Action should be subject to the usual “loser pays” cost rule.

III. Analysis

A. The general principles

[12] Receivers, and trustees in bankruptcy, possess powers to litigate but, in the usual course of affairs, they do not labour under duties to litigate. Paragraph 4 of the Appointment Order provided that the Receiver was empowered and authorized to do certain things, “where the Receiver considers it necessary or desirable”, including “to initiate, prosecute and continue the prosecution of any and all court proceedings…with respect to the Debtor, the Property or the Receiver…” So, the Receiver is authorized to bring the Recovery Action, but it was not obligated to initiate that action.

[13] The general rule is that a receiver or trustee litigates at its peril if there is no source of indemnity available to it, with the two standard sources of indemnity residing in the assets of the estate or a contract of indemnity from one or more creditors.[^1] As put by this Court in the 1984 case of Touche Ross Ltd. v. Weldwood of Canada Sales Ltd.:

The cases are old but they are legion in support of the general rule. It matters not that it appeared eminently desirable to the trustee to launch the actions.[^2]

[14] The policy reason for the general rule was explained in the Touche Ross case:

There are two conflicting policies, one of protecting successful defendants from unwarranted charges just as they would be protected when a creditor sued personally, and the other policy of encouraging diligence and fearlessness in trustees in their administration of bankrupt estates. The former is stronger and should prevail if only because the trustee has every means at his disposal to protect his position either by resorting to the assets when they prove sufficient or to the interested creditors wherever they display a sufficient interest in the litigation…[^3]

[15] The discipline imposed by a “loser pays” costs rule applies equally to decisions to commence proceedings by a receiver or trustee. As Middleton J. put the matter in Thorne v. Canadian Steering Wheel Co.:

I cannot conceive that the action would ever have been brought or pressed if the plaintiff had any idea of his personal liability, and this being now established, it will serve as a warning to trustees in bankruptcy that litigation ought not to be indulged in upon the theory that there is not a personal liability. It is not the intention of The Bankruptcy Act that the creditors should have the right to sue without incurring the ordinary risk of costs if unsuccessful.[^4]

[16] In Livent. Inc. (Special Receiver) v. Deloitte & Touche, Master Short referred to more recent re-affirmations of the general rule:

In a number of instances Canadian courts in the last thirty years have consistently rejected the proposition that simply because the entity pursuing the litigation is a Receiver or Trustee, that Receiver or Trustee need not bear the economic consequences of its decisions. As recently stated by the Alberta Court of Queen’s Bench, in imposing liability for costs on the unsuccessful Receiver Manager and Trustee, PricewaterhouseCoopers, at the end of a proceeding:

“It would be unjust for Crossing to be successful in the litigation and then be denied the fruits thereof because the Receiver Manager and Trustee pursued litigation without assuming liability to pay the costs. Such would be a one-way risk.” [ Crossing Co. v. Banister Pipelines Inc., 2004 ABQB 56, [2004] A.J. No. 81 (Alta. Q.B.)]

The Court went on to elaborate as to why a “one-way risk”, favouring the Trustee or Receiver Manager, cannot be supported:

“It is my view that Receiver/Managers, Trustees, ought not to be allowed to pursue litigation with immunity against personal liability for costs. Where there is no statutory duty to pursue the litigation and where the Receiver/Manager, Trustee knows or ought to know there will likely be insufficient assets in the estate to satisfy any award of costs, if unsuccessful, he should be held personally liable for costs (citations omitted) I also find it immaterial whether the trustee is an unsuccessful defendant or an unsuccessful plaintiff. However, it is notable that Receiver/Managers, Trustees are entitled to indemnity out of the bankrupt estate provided there was no misconduct on their behalf…”[^5]

[17] Of course, to every general rule, exceptions exist. The case of Re Solarc Construction was one such exception.[^6] In that case, pending the hearing of its appeal from a bankruptcy order, the bankrupt sought court approval of a settlement with the petitioning creditors. The trustee opposed, concerned that the settlement constituted a preference, and it pressed the bankrupt for a proper statement of affairs listing all creditors. The bankrupt refused. Eventually, the bankrupt abandoned its appeal, rendering its motion to approve the settlement moot, and the trustee moved to recover its costs from the solicitors for the petitioning creditors and the bankrupt. The court denied that motion, at which point those solicitors sought their costs personally from the trustee. The court refused, citing exceptional circumstances:

In my view, and I so find, the matter at hand is an exceptional situation where I should exercise my discretion not to award costs against the Trustee personally. As I have said above, the Trustee acted conscientiously and in good faith at all times in meeting its obligations and fulfilling its duties under the BIA and as an officer of the Court. There was certainly no negligence on its part. The Trustee was correct and proper in the essential position it took, namely, that the interests of all creditors must be protected. The Trustee was acting in the perceived best interests of the bankruptcy estate at all times, including in bringing its motion to save the estate the expense incurred as a result of the costs associated with the unsuccessful settlement approval motion on the part of the Bankrupt.[^7]

Of course, that cost order was made at the end of one stage in a proceeding when the Court was able to assess the reasonableness and merits of the trustee’s conduct.

[18] The Receiver was not able to point to any case where a court had granted a cost immunity order in favour of a trustee or a receiver at the commencement of a piece of litigation. The Receiver acknowledged that it was making a novel request.

IV. Conclusion

[34] For these reasons I dismiss the Receiver’s motion for a cost immunity order.

[35] At the end of the hearing I called for cost submissions under the two scenarios of motion succeeds/motion fails. If the motion was granted, the Receiver was seeking partial indemnity costs of $20,000. If the motion failed, the Giuliana Caprara defendants sought $20,000 in costs, Domenico Faga sought $3,361, and Presta Caparrrotta LLP sought $5,700.

[36] The issue on this motion was a narrow one. Giuliana Caprara filed two brief affidavits; the other defendants filed none. The two factums filed by the defendants were brief but, I might say, most helpful. No cross-examinations took palce. The motion took less than an hour to argue. The submissions of counsel for Domenico Faga amounted to “me too” submissions.

[37] In my view, the defendants who filed materials are entitled to partial indemnity costs.

[38] I have taken into account the factors enumerated under Rule 57, including the time spent, the result achieved, and the complexity of the matter, as well as the application of the principle of proportionality: Rule 1.04(1). In addition, I have considered the principles set forth by the Court of Appeal in Boucher v. Public Accountants Council for the Province of Ontario (2004) and Davies v. Clarington (Municipality) (2009), specifically that the overall objective of fixing costs is to fix an amount that is fair and reasonable for an unsuccessful party to pay in the particular circumstances, rather than an amount fixed by actual costs incurred by the successful litigant.

[39] I conclude that an award of costs in the amount of $3,500 to the Giuliana Caprara defendants and an award of costs of $2,000 to Presta Caparrotta LLP would be reasonable in the circumstances, and I order the Receiver to pay those amounts within 30 days.

D. M. Brown J.

Date: March 15, 2013

[^1]: Touche Ross Ltd. v. Weldwood of Canada Sales Ltd. (1984), https://www.canlii.org/en/on/onsc/doc/1984/1984canlii2103/1984canlii2103.html
[^2]: Touche Ross, supra., para. 7
[^3]: Ibid., para. 10.
[^4]: https://www.canlii.org/en/on/onsc/doc/1922/1922canlii550/1922canlii550.html
[^5]: https://www.canlii.org/en/on/onsc/doc/2010/2010onsc2267/2010onsc2267.html
[^6]: https://www.canlii.org/en/on/onsc/doc/2009/2009canlii2494/2009canlii2494.html
[^7]: Ibid., para. 39.